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We're on the cusp of a gold-backed dividend boom

Matt Badiali
0 Comments|February 2, 2012

If the gold price were to rise to $2,000 per ounce, Newmont's expected dividend would amount to a 4.4% yield

On December 31, 2001, gold owners celebrated a historic year. 

It was on that day that gold closed out the year at a higher price than where it started. Its closing price was $276.80 per ounce. 

Every year since then, gold has closed the year at a higher price than where it started. It's the greatest, most consistent bull market anyone alive has ever seen. Still, gold is the target of one critical complaint – it pays you no income

A gold position isn't like a corporate bond or a share of dividend-payer Johnson & Johnson. It's just a lump of metal. It pays you no interest or dividends. And gold mining is such a capital-intensive business, most gold miners haven't had enough cash flow pouring in to pass along to shareholders in the form of dividends. 

This is why many folks say, "Why would I own gold and earn no income on my savings when I can place it in bonds and earn 5% or 10%?" 

But we could be seeing a resolution to this dilemma. We could be on the cusp of a boom in gold dividends and income... 

It's due to the exploding price of gold... and how that's changing things at the world's biggest gold miners. Take $50 billion gold major Barrick Gold (NYSE: ABX, Stock Forum). The company's quarterly earnings per share rose 54% since the fourth quarter of 2010. Big producer Yamana Gold (NYSE: AUY, Stock Forum) is another example. The company's third quarter revenue of C$578.6 million is a 24% increase over the previous year. 

That's what most of the giant miners are seeing today. Rising gold prices are driving record profits. And several mining companies see rising gold prices as an opportunity to reward shareholders with dividends

This past April, for example, gold mining giant Newmont Mining (NYSE: NEM, Stock Forum) decided to link its quarterly shareholder distribution to the price of gold bullion. When gold trades for more than $1,700 per ounce, Newmont's annual dividend of $1.40 (2.3%) gets a boost to $1.70 (2.8%). 

Those few percentage points may not seem like a big deal, but they are. They represent the first step in a series of increases based on the price of gold. 

It's a brilliant strategy. One major appeal of Newmont's plan is its simplicity. Investors' paycheques go up as the price of gold climbs. The company designed the system to allow the most upside for shareholders, while not penalizing them should the price of gold collapse.

The difference between Newmont and its peers may seem academic to many retail investors (and fund managers for that matter). But every investor out there understands this simple concept: Newmont will pay me more money when the gold price goes up. If gold were to rise to, say, $2,000 per ounce, Newmont's expected dividend would amount to a 4.4% yield on today's share price. 

Newmont isn't the only precious metals miner "linking" its payout to rising metals prices. Eldorado Gold and Hecla Mining are also doing it. Elite silver royalty company Silver Wheaton is also set to pay larger dividends as long as silver prices are strong. If gold and silver prices remain robust, large cash flows will allow other companies to pay gold-and-silver-backed dividends, as well. 

I love the idea of collecting income from the world's best gold and silver mines. But there's one additional upside "kicker" to this idea... 

With interest rates so low, investors are turning more and more to dividends for investment income. Should gold and silver continue to march higher, miner dividends will increase... and income-seeking investors could "chase" these stocks higher. This could create a virtuous circle of share price appreciation and rising dividend income. 

That means investors who get in now will be the ultimate beneficiaries. We stand to collect gold income, plus see share price appreciation as gold and silver prices stay strong.

Tags: GOLD

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